SyndicateTwo's Stock Board

[SyndicateTwo]

The way it works is this --


Because the market right now is so unpredictable and possibly could go either way - both with justification - the way to play it is to 'roll' a collar. This is how I first got into MRVL because I wasn't sure about the stock price and saw the head and shoulders pattern setting up. But at the same time I liked the story and potential of it.

So, what do you do? The best way to play something like this is to first get into a stock when it's hitting highs. Why? Because you actually want it to fall! But you are covered no matter what. And, it's also better to do this on a stock that pays dividens because you're actually going to want to hold the stock for a long time as you trade around it.


You see, the goal here is to use just one or two stocks to play with. Becuase you're protected, you never have a fear of getting into trouble. But you do go into the trade upside down with your immediate goal in trying to cancel out that number and then any subsequent trades pure profit.


I'm using HAL right now mainly because it trades pretty much in a range between the $30s and now probably high $40s or even $50ish tops.

So you know your limits. Great! It's such a profitable and widely held stock that you never have to worry about it becoming 'dead' money like MRVL has become where it trades now between $10 and $11. That makes it very hard to profit on. You need a stock with staying power and ranges. HAL is perfect.

First, take a look at the chart ---






Now, you can clearly see the stock is waaaay overbought. So, why buy it now? Well, when you do this, it really doesn't matter where your entry is.

Let' say you buy the stock right now at $45.15. We are then going to buy 1 put contract per 100 shares. In this case, the further in the money we buy, the better our protection and the lower our overall risk. But we don't want to go too far out into the money because it starts to defeat the purpose.


So, since we need time for our insurance, we're going to go out at least to Jan 2009. That gives us 7 months. So, let's go with the Jan 2009 $50 puts. I see they are $7.40 ask. So, because we are paying for that, that actually becomes part of our entire investment.

So,

100 shares HAL stock $45.13
1 Jan 2009 $50 put $ 7.40

Total investment $52.53


Now, that is what our total investment is into this trade. But, since we own the $50 put, that gives us the right, should we ever decide to use it, to short 100 shares of HAL at a basis of $50. So, because the least amount we could ever sell the stock for is at $50, the put strike, our total risk is actually only the difference between our total investment and the put strike, or $2.53.

Now, with that trade entered, we are technically trapped into a $2.53 loss up front. If for some reason we had to get to that money and had to close out the position, we'd have to take that $2.53 loss, the absolute MAX loss we could have.

But notice something? There's no max on how much we could make if the stock shoots up. Once the stock breaks north of $52.53, our total investment, the put becomes worthless but our stock keeps going up forever. So, you have limited downside and unlimited upside.

Now technically it's the exact same thing as just buying a call option. Your risk is limited to the cost of the option with unlimited upside.

But the difference is that our trade with the protective put is that we have no time risk, other than the put expiration in which if we never did anything, we'd just add to our cost basis by buying another one.


Now that you understand that, what makes it a collar is when we start shorting calls against it. The goal being to erase that $2.53. You see what happens? If you erase that $2.53 you actually have a trade in which you can never lose money!

But our goal is to make money. The way to do it is to short calls against the stock always having the put to offset any downside. That means we actually make MORE money when the stock goes down.

Now, looking at that chart of HAL above, I think it's making a rising wedge that when breaks, could fall back to to inverse H&S level of $40. I'm convinced it's going to retest that level in the near future.

So, by feeling that way, you'd want to short the May $40 calls here to try and recoup that $2.53 as fast as possible. How? Shorting the $40 calls rather than the $45s or $50s. Why? Because if you think it's falling that much that fast, you'll get easily $4+ out of that when it does fall. And it should happen within the next few weeks which means you'd short the May's because you want time decay ASAP.

The May $40 calls are $5.50 bid. So, you'd look like this:



HAL stock $45.15
Put option $7.40
Short May calls $<5.50>



Now ideally HAL falls back below $40 and you keep the entire $5.50 call premium. Then you're already up over $2.50.

If you want to play it safe, just short the $45s or $50s and do that slowly month after month.

Eventually HAL could rise north of $50. What then? Simple. You roll up the put. What happens? Well, at $50 the put premium is all time value because it's no longer in the money, right? So, you'd want to sell it immediately to get as much back as possible. You'd then sell just 1 strike north of that. What happens? You're protection goes up and you actually get PAID to do it! That's also another way to play that.

What I do is everyday I trade the stock in and out. I try to capture at least $.20. So, by buying it at $45.15, tomorrow I'll try to sell it for a $.20 profit or if it just goes down, sell it for a loss, but buy it back .20 less. If it trades down for example I'd sell it for $44.90 and then buy it back for $44.70. Even if it kept going down I'd just keep doing that. It's really that simple.

Sounds easier than it is. But once you get in sync with the stock you can get pretty good at it. Soon you're up $10k, $20k etc and are always protected from any downside risk.